Proposed New Rules from Federal Reserve Help Consumers Looking for Home Equity Loans

It may soon become easier to shop for a home equity loan. The Federal
Reserve in July 2009 published two proposals that spell out consumer
protections and could become effective before the end of the year.

Good News from the Federal Reserve

For consumers shopping for home equity loans and lines of credit, the big news is that under the new rules, if enacted, you will receive detailed loan information from the lender within three days of them receiving your application, which is currently required for first mortgages but not lines of credit. Today, you are presented with your rate and credit limit when you sign your loan documents, forcing you to make a decision on the spot about whether to accept or decline without knowing what else might be available.

More Notice on Changes in Equity Loans

Another benefit proposed by the Fed is a forty-five day warning versus the current fifteen day warning when your equity loan is about to be reduced or terminated. And lenders would not be allowed to close a loan unless your payment is 30 or more days overdue. Currently your loan can be terminated if it is even one day late.

More Information Means Better Choices

The purpose of the proposals is to help consumers better understand their loans. To that end, if the new rules become effective, as a home equity borrower you will receive a single page of information in question and answer format alerting you about the potential risks of your loan.

Banks Are not Easing Requirements

Although it might become easier to shop for a home equity loan, actually getting a loan is becoming more difficult. The U.S. Office of the Comptroller of the Currency's annual survey of the 59 largest banks reported that for the year ending March 30, 2009 that no banks had eased lending standards, and in fact, many are requiring larger down payments, tightening credit requirements, and increasing fees. So, how do you find a lender and a loan with the best possible terms right now?

How to Shop for an Equity Loan

Many people find that online comparison sites offer a quick and easy way to shop for a home equity loan. After providing some basic information once, you will be contacted by a number of prospective lenders. Once a basic determination is made by the prospective lender that it can fund you, you will be asked to provide detailed information including proof of income, home value, and assets. Then you will receive a written loan offer from each of the lenders. From there, you can use a loan calculator to compare offers.

Use Your Credit Report to Your Advantage

One of the determinants in whether you will be funded and what your interest rate will be is your credit score. It is a good idea to know before you apply for your loan what exactly is on your report. You can get a free credit report once each year from the three credit bureaus simply by requesting at www.annualcreditreport.com. Knowing what is on report before applying for an equity loan or line of credit allows you to dispute inaccuracies, which could potentially save you hundreds if not thousand of dollars in interest.

How to Compare Equity Loan Closing Costs

Speaking of interest rates, keep in mind when comparing loans to factor in all the costs, and not just the interest rate. Be sure to look at points, appraisal fee and other closing costs, which all contribute the cost of your loan, whether or not they are rolled into the term of your loan. A closing cost calculator can be especially helpful in analyzing multiple loan offers, especially those with more than one parameter. Enter all the variables for each offer into the closing cost calculator, then save the information to a spreadsheet. There you will easily be able to see the difference among the loan offers.

Further Calculations

If you are anticipating a higher income in the years ahead, and your loan does not have a prepayment penalty condition, you can take the information saved in your spreadsheet and input it into an amortization calculator to see how much you can save if you are able to pay off your equity loan early.

The key to getting the best deal on an equity loan or line of credit is to thoroughly understand the product you are being offered. And the best way to understand the products is by doing an equal comparison using calculators designed to do the job.

Posted By : Lorraine WatkinsLorraine Watkins is a regular contributor to business and education websites.
She is a notary in California specializing in loan documents. She holds an MA
in English from California State University, East Bay.